Safe haven buying rises as Bitcoin sinks, yen funding trade wobbles and Fed cut odds increase
Bitcoin’s latest sell-off is again driving equity volatility, just as pressure builds on the “yen carry trade” that has quietly financed risk assets for years.
According to CNBC, US stocks fell on Monday as Bitcoin dropped about 6 percent and traded below US$86,000.
The S&P 500 slipped 0.53 percent to 6,812.63, the Nasdaq Composite declined 0.38 percent to 23,275.92 and the Dow Jones Industrial Average lost 427.09 points, or 0.9 percent, breaking five-day win streaks across all three indexes.
As per CNN, Bitcoin has fallen more than 6 percent in the past 24 hours, tumbling from just above US$91,000 to roughly US$85,600, after an earlier late-November slide to just above US$80,000 — about 35 percent below its record high above US$126,000 set in early October.
Ether has dropped almost 9 percent over the same 24-hour period.
CNN also noted that the earlier crypto downturn pulled tech leaders and the broader market lower, with the S&P 500 almost 5 percent down at one point in November before eking out a slight monthly gain, while the Nasdaq posted its first losing month since March.
CNN reported that a key driver of the latest weakness is concern about the “yen carry trade.”
The Bank of Japan has signalled it could raise interest rates at its policy meeting later this month, partly to address stubborn inflation.
Yields on benchmark Japanese bonds have reached their highest level since 2008, pointing to expectations for higher rates and a stronger yen.
That shift threatens the long-standing strategy of borrowing relatively cheap yen to buy higher-yielding assets such as US stocks and cryptocurrencies.
As borrowing in yen becomes more expensive and the currency potentially appreciates, the carry trade loses appeal.
CNN said this could push traders to sell Bitcoin and equities to repay loans and limit losses, while also reducing new flows into both crypto and stocks.
Matt Maley, chief market strategist at Miller Tabak + Co, warned in a note cited by CNN that an unwinding of the yen carry trade would “drain liquidity from the system” and “would not be good for the stock market.”
He added that markets are “not out of the woods quite yet,” and that “the renewed decline in Bitcoin could create some real problems for the stock market” if the underlying issues do not ease, potentially putting “real headwinds” in front of any year-end rally.
At the same time, investors are adding to perceived safe havens.
CNN reported that flows into gold and silver have picked up, with silver prices hitting a record high on Monday and doubling this year, supported by both safe-haven demand and rising industrial use.
According to CNN, Bitcoin is now down roughly 9 percent year-to-date, compared with a gain of about 16 percent for the S&P 500 and an almost 62 percent rise in gold, while the S&P 500 sits less than 2 percent below its late-October record high.
Seasonality and central bank expectations still offer some support.
CNBC, citing the Stock Trader’s Almanac, said the S&P 500 has historically gained more than 1 percent on average in December, making it the index’s third-strongest month since 1950.
CNBC also reported that Robert Schein, chief investment officer at Blanke Schein Wealth Management, described current conditions as a “period of digestion” but said “the backdrop for stocks remains strong right now, especially given the high likelihood that the US Federal Reserve will cut interest rates again next week.”
Bloomberg reported that markets continue to price in another Fed rate cut next month, with swaps implying almost a full quarter-point reduction after New York Fed President John Williams said he saw room to lower rates again in the near term amid labour-market softness.
Bloomberg also noted that investors are watching the Bank of Japan closely for any hint of a December rate hike, given its potential impact on the yen carry trade and global risk sentiment.
